Nov 17, 2018

1. Deep Dive: The drug pricing maze

Illustration: Sarah Grillo/Axios

The system for setting drug prices in the U.S. is a labyrinth. It can be enormously frustrating for patients — and enormously rewarding for the drug companies, pharmacies, doctors, hospitals and assorted middlemen that profit along the way.

The big picture: The cost of a drug depends on many factors: whether it’s a brand-name product or a generic; secretive industry negotiations; even the way the drug is administered. Each patient's price may be different.

  • “There’s so much variability, and that’s where all the money is being made,” said Eric Pachman, a former pharmacy manager who co-founded the drug data firm 46brooklyn Research.

How it works: Using publicly available data and common industry assumptions, Pachman built out a rough, simplified sketch of how money changes hands for a “typical” generic drug.

  • This drug would cost about $3 to make and would sell for about $15.
  • So, what happens to the other $12? It’s split among the manufacturer (about $3), the pharmacy ($1.50), a wholesaler ($2), and, finally, the largest share goes to the company that manages your insurance plan’s drug benefits ($5.50).

The numbers would look a lot different for the more expensive brand-name products that drive most of America’s drug spending. Those are the ones you’ve probably heard of, like the Epi-Pen or Humira, the world’s top-selling drug.

  • They often start with high sticker prices. Humira’s is more than $58,000 per year, according to Elsevier's Gold Standard Drug Database.
  • Different insurance plans negotiate different discounts off that list price. All of them are kept secret. The negotiators also keep some of the savings for themselves. That number, too, is a secret.
  • There’s a whole different pricing system for drugs administered by a doctor, and yet another system for certain hospitals.

The bottom line: It’s a free-for-all behind the scenes.

  • “The system is vulnerable, and you can abuse it,” said Mick Kolassa, a retired consultant who helped drug companies with pricing practices for almost 40 years.

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